Save Safe: Dividend Plan Alters Retirement Planning

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Remember everything that's been drilled into your head about how to pick different investments for your retirement and taxable accounts?

Well, scratch all that.

The proposal by the Bush White House to eliminate the tax on stock dividends could completely change the way you invest in retirement accounts. Under the plan, you'd get a nice tax break when investing in a taxable account but wouldn't get any direct benefit when socking money away in a 401(k) plan.

Of course, the operative word is could. No one knows what the final legislation will look like, and this tax-cut plan could change dramatically -- so don't touch your investments quite yet. But now is the time to start thinking about the implications of a dividend tax cut on your portfolio.

Right up front, the elimination of taxes on dividends makes taxable accounts more attractive. In a regular old brokerage or mutual fund account, you wouldn't have to pay taxes on most stock dividends you receive. And if a company decides to hang on to dividends rather than paying them out, you -- as a shareholder -- would still get a tax break when you sold the stock. The proposal essentially delivers a cut in dividend and capital-gains taxes, which makes it a lot less costly to invest through a taxable account.

On the flipside, tax-deferred accounts, such as 401(k) plans, become a little less attractive. In a 401(k), you make pretax contributions to that account, and your investments grow tax-deferred. But when you take out that money, you have to pay ordinary income tax on those withdrawals. And the Bush plan wouldn't change that. Essentially, you could wind up paying taxes on dividends that come out of a 401(k) that would otherwise be tax-free.